“They were the best of times, they were the worst of times; each with too much supply in the face of cyclically low demand. Just as in Dickens’ Tale of Two Cities, every real estate cycle is the same, yet every cycle is different,” Dr. Peter Linneman stated in his recent White Paper, “The Tale of Two Cycles.” Linneman explains that in the crashes of the early 1990s and 2009, there was an abundance of supply for too little demand yet both offer distinctive features and lessons for the future.

Both crashes were not only caused by a much greater supply of space than demand but also due to a retreat of real estate capital. Linneman explains that the crashes evolved into this enigma very differently. Dr. Peter Linneman states, “The recent crash was caused by a sharp decline in space demand meeting modest overbuilding. Thus, the second quarter of 2007 registered a healthy CBD vacancy rate of 9.7%, and most observers (we were among the minority which foresaw a recession) felt that due to the so-called Great Moderation, the demand boom would never end. In marked contrast, the 1990s real estate crisis was the result of out of control development meeting a modest cyclical demand decline.”

In his latest White Paper, Linneman illuminates on the late 1980s. The economy was booming during this time but the supply was increasing so vividly that vacancy rates stayed dangerously high. He states an example on the matter, “Even as the CBD office vacancy rate was 15.6% in 1989, developers refused to stop building, assuming that their new speculative buildings were immune to the forces of supply and demand. Hence the recessionary decline in demand in 1990 caused a complete real estate collapse due to the already existing excess supply and a burgeoning pipeline of new supply.”